How To Save So Effectively You Don’t Feel Inflation’s Bite

While the inflation rate is only one measure of economic stability, it is often a good indicator of how well Americans feel their finances are doing. The Federal Reserve Board likes to keep inflation at around 2% to maximize stability, but economic factors — like pandemics, consumer spending habits and interest rates — often drive that figure up or down.

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While Americans can’t predict this rate or control it, it’s possible to set up your finances, particularly savings, when inflation pushes the cost of living up significantly, so that you’re prepared to absorb the extra costs.

Financial experts recommended some tips for how to save (and invest and cut costs) so effectively that higher inflation doesn’t hit so hard.

Money mistakes the super wealthy never make - that you might be doing now.

Start Saving Immediately

Bob Chitrathorn, CPFA, CFO and vice president of wealth planning at Simplified Wealth Management , said there’s no shortcut to saving. The time to save is now, whether you’re in your first job or close to retirement. The more savings you have, the better.

If that seems obvious, he added, “Unfortunately, people just aren’t used to saving and have to find various ways to do so.”

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Choose Investments That Get Ahead of Inflation

Saving doesn’t just mean putting money into a savings account, but it also means making investments.

“A great way to not feel the bite of inflation is to make sure that your investments are growing more than the inflation rate,” Chitrathorn said.

That was easy to do in 2020 when the inflation rate was 1.2%, but much harder to do in 2022, when the inflation rate spiked to 8%. As of July 2024, the rate was a reasonable 2.9%. If inflation has you spending more per year than in prior years, ensure your investments are growing by at least that.

“That in itself isn’t an end all be all because you might need your investments to grow more than that if you’re planning on using some for the future,” Chitrathorn suggested.

Investing in the stock market and real estate are two areas where you have a better chance at significant gains.

Mix Up Your Investment Approach

Don’t just throw some investments at the wall and expect them to bring you the same returns forever, according to Cristian Mundy, CFP and senior wealth manager at Life Line Wealth Management.

He recommended you diversify your investments based on your time horizon, risk tolerance and the assistance of a financial planner. You’ll want to change how these factors account for inflation and interest earnings.

“Think of money set aside in buckets — one bucket is what you may need in months, another is what you’ll need in a couple of years and the last one is what you’ll have in a handful of years,” Mundy said. “If your money isn’t outpacing [inflation], you will be behind as inflation has and will always be present.”

Curb Your Spending Now

Whether you build an extra robust emergency fund, which should cover between three- and six- months’ worth of income, or you carve out unnecessary expenditures such as dining out and goods you don’t need, look for ways to free up funds to put toward savings, Chitrathorn said.

“Once you know how you can save, then you can figure out where to save,” he added.

Creatively Cut Expenses

Gerry Poirier, finance expert and CEO and founder of AngeLink , a social crowdfunding platform by and for women, suggested additional ways to cut back on expenses to carve out extra money.

• Cut back on unnecessary subscription services and dining out to free up more money to save.
• Use public transportation, carpool or ride a bike to save on gas.
• Rent your car out through companies like Turo.
• Negotiate with service providers to see if you can lower your monthly bills.
• Shop at discount grocery stores such as Costco or Sam’s Club to buy in bulk.
• Eat in more than you dine out.
• Shop for generic brands, and use coupons and cash-back offers for everyday items.
• Plan a “staycation” instead of an expensive vacation and travel to nearby parks, beaches, mountains or countryside.

Save in Higher Yield Accounts

For liquid funds, like those you keep in an emergency fund, invest them in high-yield savings accounts or money market accounts.

“Nowadays those can range from 3% to 5%, so not only do you accomplish liquidity, but you also somewhat keep up with current inflation rates,” Mundy explained.

Deal With Debt

While paying down debt might not seem like it has anything to do with saving, when you consider that high-interest debts like credit cards are continually accruing interest, you may realize that holding onto debt keeps you behind.

Paying your debts off frees up money you can put toward savings. Mundy recommended starting with the debts with the highest interest rates and the smallest balances.

Beef Up Your Skills

Whether you feel good about your earning power or know there’s room to grow, Mundy said that investing in yourself by enhancing your skillset, knowledge and well-being is always a good idea.

When in doubt about how to take any of these steps, consider consulting with a financial advisor to help you get on track.

This article originally appeared on GOBankingRates.com : How To Save So Effectively You Don’t Feel Inflation’s Bite